Oil Down on Bleak Near-Term Demand Outlook

(Bloomberg) -- Oil extended losses after closing at the lowest level since June amid a worsening short-term demand outlook and a further deterioration in the relationship between the world’s two biggest economies.

Futures in London traded near $42 a barrel after dropping 1.5% on Monday. Only four of 10 Asian refiners surveyed by Bloomberg said they would be trying to buy more Saudi Arabian crude after the kingdom cut pricing for October as consumption remained below pre-virus levels. The tepid response is a sign of the sluggish demand backdrop in the world’s biggest oil-consuming region.

President Donald Trump said that he intends to curb the U.S. economic relationship with China, threatening to punish any American companies that create jobs overseas and forbid those that do business in China from winning federal contracts. He didn’t say when he would implement the policies but framed the moves as part of a second-term agenda.

A stalling Asian demand recovery, the end of the U.S. summer driving season and more supply from the OPEC+ alliance are adding up to a bleak short-term outlook for oil prices. Brent crude’s three-month timespread is nearing the widest contango -- where prompt prices are cheaper than later-dated ones -- since late May, an indication that concerns about over-supply are returning.

“The Saudis cutting prices just shows you the demand recovery is not a guarantee,” said Vivek Dhar, a commodities analyst at Commonwealth Bank of Australia. “Transportation is still very challenging and transportation fuels account for two-thirds of oil demand.”

China, which has played an outsized role in supporting oil prices this year, won’t likely be able to lend as much of a hand over the next few months. The world’s biggest crude importer bought less for a second month in August, and its purchases will probably remain lower as independent refiners run out of quota after a buying spree earlier this year.

Widening contangoes in both Brent and WTI combined with a slump in tanker rates may also be starting to incentivize floating storage. Storing crude at sea has become profitable again for northwest Europe and the Mediterranean, shipbroker and exchange data compiled by Bloomberg show.

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